Bullish Hammer

• Hammer candles have a small real body that forms at the upper end of the days trading range

• The candle can be either blue or red, analyst usually do not differentiate.

• Lower wick at least twice as long as the real body

• No (or almost no) upper wick

After a bearish sell-off a significant rally brings price back up creating a long bottom wick. By day end buyers are able to push prices back to the upper range creating a short body.

The Hammer pattern signifies a weakening in bearish sentiment. The long lower wick signifies an initial continuation of the downtrend. However, renewed buying sentiment acts as support and drives the price higher to close near its opening price.

• Strength and Confirmation

The strength of a Hammer formation depends on where it appears. If a hammer forms near support levels, then the likelihood of a strong bullish reversal is high. However, if the hammer forms in the middle of a trading range it tends to have little significance.
In ideal conditions traders want the wick length to be several times longer than the body of the candle. The longer the candle, the more buyers were able to drive price back up and the stronger the bullish signal this candle provides.

Although above we state that most analysts do not care if the small candle is red or blue, traders will actually take a blue candle to suggest a stronger bullish signal. Buyers being unable to bring the close price above the open price suggest additional bullish strength. Generally the difference between blue and red candles is minimal.

The bullish Dragonfly Doji serves as a stronger buy signal than the Hanging Man pattern. Since a Dragonfly candle (where open and close are identical, but we see a low similar in length to the Hanging Man) reflects more uncertainly and lack of direction, candlestick analysts will usually take it as a stronger buy signal.

• Hammer vs Hanging Man.

Alone, Hammer and Hanging Man candles look identical. Their difference lies in what type of trend the candle follows. If the market had been trending up for a while the formation is a Hanging Man. In fact the name, Hanging Man, suggest price is hanging over a precipice, ready for a fall. Hammers follow a bearish trending market and its name suggest price has already been weighted down.

Although traders will usually wait for confirmation the next day, look for buying opportunities to come.